Holman Jenkins offers some enlightening thoughts on the future of public versus private firms:
Look upon Blackstone's prospectus, if one is ever issued, as a self-rebuttal to Blackstone co-founder Stephen Schwarzman's comment: "The public markets are overrated." ... Mr. Schwarzman has offered two observations, perfectly separable. One is that government regulation, shareholder lawsuits and political mau-mauing have made the bureaucratic and legal overhead of being a public company prohibitive in relation to the benefits.
Yup. Costs attend going public as well as benefits, and the costs likely have been rising since Enron and WorldCom. But regulation is driven by headlines, and headlines about the power of private equity now are making Washington hungry to regulate and tax the private equity firms more punitively. So it goes: Wealth holders are constantly on the hunt for new legal and financial structures to preserve their wealth from predatorial government, and government is never far behind.
Second, and more dubious, or at least more subjective, is Mr. Schwarzman's complaint that the public market's obsession with quarterly profits works against intelligent management of companies for the long term.
Here we come to the real crux. Complaints about short-termism always issue from managers, who naturally prefer freedom from second-guessing and nitpicking. But the shoe rapidly shifts to the other foot when an owner-manager wants to retreat to a more passive role. Then the second- guessing of public investors becomes a blessing not a curse. Few of us, after all, are prepared to extend to our agents the trust and confidence that we extend to ourselves in caring for our precious money.
And the benefits of a public share price only begin with the opportunity and incentive for all the smartest money in the world to inform itself about a company and its prospects and cast a weighted vote in the stock market. Constant feedback from well-informed investors is also a form of competitive intelligence, providing a signal when management's strategies aren't working, its assumptions need revisiting or new developments in the marketplace warrant its attention.
A public share price also allows no ambiguity internally about a company's overarching purpose, no difficulty in communicating its agenda and challenges up and down the chain of command, nor any uncertainty about what constitutes success and failure. And a public listing offers a transparent, easily understood mechanism to attract talent to a growing operation like Blackstone in the form of stock options. Stock options allow risks to be shared with recruits, without the arbitrariness or unreliability of promised bonuses and profit sharing after the fact.
Most of all, a public listing provides the incentive and means for well-informed outsiders to intervene and force a change in direction when a company is off track.
These benefits have tended to be downgraded in the recent enthusiasm for escaping from the public markets. While Mr. Schwarzman runs Blackstone, he (like anyone) undoubtedly prefers to be free of outside monitoring by busybody investors and analysts and financial journalists. Someday, though, he will hand off to a successor whom he will prefer not to trust quite so much. One onlooker, Christopher Bower, chairman of Pacific Corporate Group, was aptly quoted in Saturday's Journal about why a public listing becomes attractive at this point to Blackstone's founders: "They can use this to further institutionalize their business and make sure Blackstone is around 100 years from now, versus relying on any one personality."
If the public firm is likely to survive, as I also believe, I suppose it remains to be decided whether it will be in the form of a corporation or a "public uncorporation." My guess is the former. Even if it's true that publicly traded LLCs or partnerships have efficiency advantages over the corporate form, a debatable proposition but not one I propose to debate today, path dependence, herd behavior, and other incentives towards inertia likely will continue to bias choices of form towards the corporation at least in the near term. With 15 or so years left before I retire, I'm reasonably confident that I'll still be teaching mainly corporate law when I call it quits.
